An investor’s introduction to commodity trading – Click Liverpool

Commodity trading is having a revival given rising global inflation rates. Use this investor’s introduction to commodity trading to explore why this is proving popular, how to add commodities to your portfolio, and the benefits and risks of this type of investment.

What is commodity trading?

Commodities are basic goods that can be transformed into other products and services. Commodity trading is the sale and purchase of these physical assets, a practice that goes back centuries to the days of the Silk Road.

Commodities favoured in modern-day trading are high-value goods that have an essential use such as crude oil, base metals, and gold which holds its value in times of economic uncertainty.

The benefits and risks of commodity trading

There are many benefits to investing in commodities but, as with all investment prospects, the risks must be considered too.

Benefits

The main advantage of adding commodity trading to your portfolio is that these assets have a value that’s resistant to changes in inflation. This stability means that the demand for commodities rises during times of economic uncertainty, in turn pushing up the price.

Diversifying your portfolio to include physical assets can therefore safeguard your investments against sudden and significant loss due to unexpected economic downturn.

This means that there’s also the potential to maximise your returns when it comes to commodities trading. International demand is strong which helps the asset value to stay steady throughout changes to exchange rates and interest rates and the health of the global economy.

Risks

Despite this relative stability in terms of value, commodities are uniquely much more volatile than other kinds of investments. This is especially true if you put all your eggs in one basket, either by choosing one commodity from a single source or by limiting yourself to one economic sector. This volatility is because supply and demand for commodities can fluctuate dramatically with no warning.

Consider the recent spike and fall in the price of Urals oil following Russia’s invasion of Ukraine. As the EU banned imports of Russian oil by sea throughout 2022, the price plummeted by over 50%.

Given this volatility, investors have to hedge their bets and buy futures. These ‘futures’ are an obligation to buy or sell a particular amount of the asset for a set price on a certain date. It’s therefore possible to get caught out by an unforeseeable event and incur a significant loss, although futures markets are regulated by the Commodity Futures Trading Commission (CFTC).

How can you invest in commodities?

There are several ways to invest in commodities. Those with confidence in their purchase and the capability for safe storage and resale can choose to buy the assets directly. Alternative options include buying shares in commodity companies or participating in a mutual fund or exchange-traded fund (ETF).

ETFs are a popular option as they provide more flexibility with commodities trading. These pooled investments can be bought into or sold on the stock exchange in the same way as regular stocks but can contain all kinds of investments including raw assets.